The $3.6 Million Mortgage

There are few things as interesting as the mortgage market (to me, anyway). It has been a fascinating study and exercise to follow the demise of the subprime mortgage market. There have been volumes written about it here, here, and here. I am not going to take the time to rehash the discussion especially since the folks I just mentioned have done such a great job. One interesting observation I've noted more and more frequently is the complete swing of the pendulum into additional lending areas that don't quite make sense to me.

The predominant theme in 2004-2006 was to extend more and more credit to people who were less and less willing and able to repay. Well, that ship hit the mother of all icebergs (and we all know what happens then). The market is still flush with liquidity and investors don't like those funds just sitting around, so they need to find an alternative to lend money. What is the complete opposite of people with poor credit and no assets? How about wealthy people with plenty of assets.

The New York Times has a great article (here, registration req'd) documenting this phenomenon. In a nutshell, there are more and more companies blowing the roof off of traditional lending standards when it comes to multi-million dollar homes and mortgages. Let's take a look at Seth Weinstein:

"SETH WEINSTEIN is not a guy who likes to run a tab. He has only two credit cards — one for his personal use and one for business — and he says he pays them in full each month. He even wrote a check the last time he bought a car, a white Volvo convertible.

But Mr. Weinstein, who for nearly the last 30 years has developed office buildings and condominiums in the New York area, and who seems to be allergic to the idea of accumulating debt, was approved for a $3.6 million mortgage last month for the $4 million condominium he is buying at the Century at 25 Central Park West.

The loan is a two-year floating-rate mortgage that will carry payments of roughly $24,000 a month at what he estimates will be an interest rate of 8 percent through the term of the loan. He plans to refinance in two years after making some renovations on the apartment.

Mr. Weinstein chose the condominium over a similar co-op apartment, where the limit on his mortgage would have been $2 million. He said he wanted to use as little of his own money as possible to buy the apartment, preferring to invest it in Connecticut real estate, where he expects the returns to be 25 percent.

“It’s not the case that I’m cavalier about debt,” Mr. Weinstein said. “I can make a much better return on that in my business.”

It's worth noting that this article is largely anecdotal evidence and centers around New York City. Also, the gentleman referenced above is a real estate developer, but many of the people seeking these types of mortgages are investment bankers, hedge fund executives, and Gordon Gekko wannabes. For the most part these folks have been able to do no wrong in the last few years. My question is this - when the markets experience the inevitable correction, what will happen to their compensation? What will happen to their assets? I would like to think that they are all well diversified, but I don't know.

I thought this was worth mentioning because this is one of the very few instances I've found where underwriting guidelines have been loosened rather than tightened. I will continue to monitor the market and will let you know of any interesting/substantial changes that occur.

Thanks for reading and have a great holiday week!